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I am confusing. In some previous lectures, you repeatedly told us to not change the fixed overheads amount because it is fixed and should not be changed due to production quantity. Could you please explain me why in this example, the fixed overheads changed due to increase of production?

If a question simply asks you to flex a budget then we do assume fixed overheads stay fixed (and are effectively using marginal costing).

However, with variance analysis, if we are using absorption costing then the most obvious reason for the actual profit being different from the budget profit is because we sell more (or less) units than budgeted. We therefore expect the difference in profit to be the difference in the units sold multiplied by the profit per unit. However, this effectively treats the fixed overheads as though they are variable, which creates a problem for the fixed overhead variances (as you will see in the rest of the lectures).
You won’t ever be asked to produce a flexed budget using absorption costing but I do it here so as to (hopefully) make sense of the fixed overhead variances which are dealt with later. (As you will also see later, if we are doing variance analysis using marginal costing, then the fixed overhead problem does not arise)

Hi Sir. Why is the figure for Fixed OH for flexed budget not the same with the one in fixed budget in example 1? Why does the figure of fixed OH for flexed and fixed budget in the budgeting lecture for example 2 are the same which is $10,000? Kindly clarify.

If you are simply required to flex a budget then you always assume marginal costing and therefore the fixed overheads stay fixed.

However, the reason I flex the fixed overheads in this example is because they are using absorption costing, and it is because absorption costing effectively does flex the fixed overheads it explains why the fixed overhead variances when using absorption costing need to take account of it (with the volume variance, that does not appear when it is marginal costing).

so you’re saying when I use marginal costing approach, they won’t be any Fixed OH volume variance to be calculated and Fixed OH are fixed but there would be if I were to use Absorption costing approach and fixed OH can be flexed??

Yes – if it is marginal costing then the only fixed overhead variance is the expenditure variance.
If you watch all the parts of the lecture then you will see that I spend time explaining this.

However, fixed overhead variances are in fact unlikely to be asked in F5 because they were examined in F2. It is the advanced variances in the next chapter that are what are asked (but it is important to revise the basic variances in order to be able to understand the advanced variances).

Regarding the 4 parts for standarding costing and basic variances,am I suppose to expect to have them in exam or its matter of introduction basis for the next chapter )more variances analysis (Ex: Mix and Yield variances)

Basic variance analysis is examinable in Paper F5 because it is assumed knowledge from Paper F2.
However, it would only ever just be a small part of a question if it is asked – otherwise any variance questions will be from the next chapter (i.e. mix and yield; planning and operational; advanced idle time). It is impossible really to make sense of the advanced variances without already thoroughly understanding the basic Paper F2 variances.

There is no point in comparing actual expenditure with original budget expenditure, if we are using budgets for control or to measure managers performance.

The reason is that if (for example) we produced two times as many units as we originally budgeted, then obviously we would expect to have higher costs. So we flex – see how much we would have budgeted for the actual production, and then it makes sense to compare with what we actually spent.

Despite high speed broadband service I cannot watch the videos. It will only show blank as if it going to play and yet it does not play. Even the introductory video does not play but I hear the audio at the background.

The video is working fine, and so the problem must be at your end (although apart from the heading, I do not write anything until 1.50 into the recording).
You should visit the support page (the link is above) and hopefully you will find a solution there.

There will not be a full question on basic variances, but they can certainly be tested as part of a question.
Also, understanding basic variances is essential to be able to deal with planning and operational variances.

Fixed overheads in total certainly do not change with the level of production.

However, if we are using absorption costing and doing variance analysis, then simply assuming the the actual profit should be the actual sales units x the standard profit per unit, is implicitly treating the fixed overheads as though they were variable.
This is not the case and this is why we have the fixed overhead volume variance appearing later.

The reason I produced a full flexed budget was so that later the reason for fixed overheads volume variance would be clear.

but when we were budgeting with you in “Budgeting” lecture, the purpose of preparing flexed budget was to compare the figures with actual budget and then define the variances. Absorption costing was involved too. But then we did not adobt fixed costs as variable costs for variance defining purposes.

By all means, and even simpler is just to multiply the budgeted sales by the standard profit in order to get the budget profit!!!

However, you will not be asked to produce the fixed budget (or the flexed budget) – the reason I have done it in the lecture is to make it clear what the variances are actually calculating – the difference between the actual figures and the flexed figures – i.e. the standard costs for the actual production (not the standard costs for number sold).

Eventually i dont heard on this lecture why you compute variance of fixed overheads, i thought that they are fixed even if we sell more units, and we just appotrtion them on more units. Could you explain? Thank you

Fixed overheads should indeed be fixed, but if we are using absorption costing then we are charging fixed overheads on a unit basis. Using standard profit per unit is automatically treating fixed overheads on a unit basis, and so because they do not in fact change with the number of units this is why we have the fixed overhead volume variance.

Are basic variances really removed as adnanaadi101 is saying? I get the logic that we have to understand the basics in order to get the advanced but I was hopping to get some question about basic variances because they are easy.. Also I am surprised to learn that they are removed given that there is a whole section in my revision kit for basic variances question, why would they put it if they are removed, can anyone confirm please?

..and if they are removed, are we still be required to produce an operating statement?

You will not be asked a full operating statement, but you can be asked any of the individual variances as part of a question (also you need to understand basic variances to be able to calculate planning and operational variances).

i think open tuition is the only best thing in life that is free: you guys are doing a marvellous job but i would suggest you try solving exam type questions in your examples because the exams are based on senarios which are sometimes difficult to understand but most of your examples are straight forward

@chiclarence, I understand your point, but the purpose of these lectures is to teach people the concepts.
We have uploaded separately lectures that work through past exam questions, and will upload more of these as time permits.

Not convinced why fixed overheads of the Flexed budget should not be the same as the Budgeted(The Standard) ?Flexed Budgeting was examined in June2011 Q3 and Fixed cost of the budgeted and the Flexed was the same .Have I missed something here? Is there any one up there to drop me a line of explanation please?

@Et, If you are asked simply to produce a flexed budget, then certainly it makes sense to keep the fixed costs as per the budget figure.

However, for variance analysis using absorption costing we are effectively flexing the fixed overheads (as in the example in the lecture).
The reason is that the sales volume variance is calculated based on the standard profit per unit. Doing this effectively assumes that the fixed overhead per unit flexes (otherwise the standard profit per unit would change). Because of this we also have a volume variance for fixed overheads.
The flexing in this example is to illustrate what is happening, and why. In a variance question in the exam you will not actually be asked to flex the budget – you will be asked to calculate the variances directly and possibly also produce an operating statement.

@johnmoffat, My original question was raised in Nov2011. Today 19April 2012 I saw your reply of 15 Feb2012 .As I did not pass F5 last time I still need to know the answer why? Thanks for that.

John,You also said that” in the exam you will not actually be asked to flex the budget ” What was qustion no 3 of June 2011 asking for 12 marks then? I may not have understand what the question is about ,as always is the case for me when it comes to ACCA papers, but this specifc question was asking to flex the budget. Check it out if you have a chance and prove me wrong.

@Et, My answer said that in a variance question you will not be asked to flex the budget but to work out the variances directly.

In the June 11 exam, part (a) of question 3 did ask for a flexed budget, but it was not asking you to calculate the variances. (Parts (b) and (c) asked about variances but were not related directly to the flexing).

Using absorption costing implicitly flexes the fixed overheads. This is why in Paper F2 there is under or over absorption of fixed overheads, and it is why in Paper F5 that the fixed overheads variances are not just the expenditure variance (as with marginal costing) but also the volume variance (which can be analysed into capacity and efficiency).

The reason the example in the course notes flexes the budget first is simply to explain the problem and the reason for the extra fixed overheads variances, rather than simply quote rules (even thought the fixed overhead variance ‘rules’ are of course given in the lecture.)

@johnmoffat, Thank you so much for taking your time .I felt that some one is keeping an eye on us to help us achieve our goal which is so encouraging!

Opentuition has improved since the last time I used it.Your responses are quick. I wish people are aware how much this means .

It costs £985 to attend 4 days tuition and 4 days revisoin at Kaplan.It might be more this year I don’t know, I did not pass last time so I am not attending class this time.I am revising useing my notes and OT.

How much does it costs at OT ? FREEEEEEEEEEEE!!!!!. Listen every body it is FREEEEEEEEE Please be appreciative and tell the wold so that we will get more out of it.